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It’s all about Servitization

The IoT (Internet of Things) is facilitating servitization and a transition toward a more outcomes-based economy. But the real question for you is do you understand how your company can leverage it to help you work smarter, not harder? The other key points that companies need to rethink in today’s connected economy is the way products are designed and manufactured to the way they’re sold, operated, and serviced. And this last point—product servicing—is worth underlining.

For years here at Connected World, we’ve been saying that one of the key selling points of the IoT is its ability to “open doors to new revenue streams.” Well, guess what? IoT services is truly where it’s at. Servicing devices, machines, and other equipment using IoT data is a huge opportunity for so many vertical markets. And there are going to be many different types of services beyond maintenance that change the dynamic between customers and suppliers.

This impressive trend is known a “servitization.”

Servitization is doing three important things:

Helping companies make money

Enabling companies to keep with their competitors, and

Building lasting relationships with customers.

These are facts. Excluding the non-profit sector, if you’re in business, you’re in it to make money. But the fact is we don’t like to publicly admit it when servicing our customers. Maybe it is because we all want to tell our customers that we just want to serve them out of the goodness of our hearts. But even the most passionate businessperson is ultimately looking to earn a living.

Using IoT-generated data to sell services that complement a product portfolio is smart business, and it’s a great way to kill two birds with one stone. Services make your customers happy, and they also create opportunities for new revenue streams.

Servitization isn’t exactly new, but it is an important trend right now that’s shaping how enterprises monetize data and the IoT, especially in the industrial arena.

One of the best explanations of this word—“servitization”—comes from Andy Neely, who is pro-vice-chancellor of enterprise and business relations at the University of Cambridge.

He formerly headed up the Institute for Manufacturing and the Manufacturing and Management division of the Engineering Department at Cambridge. In a blog Neely wrote to address the topic, he defined servitization as a “transformation journey,” often involving manufacturing firms, in which businesses develop the capabilities they need to provide services and solutions that supplement their traditional product offerings.

Neely’s definition is spot on, and the phrasing “transformation journey,” captures the idea that servitization is a process that’s never really complete. Services evolve with time to meet the needs of customers and suppliers alike. That’s what’s so great about the IoT service opportunity: it’s like an ocean full of possibilities.

In order to take advantage of the move toward servitization, most companies are going to need to make an internal shift. Instead of thinking about products as mere products, manufacturers and other industrial companies need to start thinking smarter.

Products aren’t just products; they’re platforms with which companies can deliver a service. As Neely puts it so effectively: “(companies) have to build solutions that deliver the outcomes their customers want and value.”

The combination of products and services ensure customers are getting the outcomes they want, not just the products they want.

How do we know that this journey toward servitization is a profitable one? Let’s take a look at some findings from recent research.

In Q1 2018, an enterprise software company, based in Sweden, conducted a research study to better understand the servitization.

The study showed that a majority (62%) of manufacturers involved in planned maintenance or service contracts reported profitable service operations.

What’s more, pure services organizations were six times more likely to report profitable service operations if they operated with outcomes-based services models.

This is compared to businesses simply selling aftermarket service contracts. When a company moves from a break-fix model to an outcome-based service model, it’s taking what used to be a “necessary evil” and turning it into something that enhances revenue and customer service simultaneously.

It may be tricky at first to change the mindset within a company to start thinking in terms of an outcome-based model, but the benefits for all parties involved are hard to ignore.

So, just how much can post-sale services enhance revenue? This report says equipment OEM (original-equipment manufacturers) usually have an 8-15% margin on new product sales, but aftermarket service can generate up to eight times that revenue throughout the equipment’s lifecycle.

This just might seem like a compelling story if you’re an industrial company looking at making the leap to selling services. What’s more, this research also says that across industrial sectors, companies that report being further along in their servitization journeys also reported higher profitability. Thus, this demonstrates that the journey is worth taking—at least, it’s worth it if you’re one of those businesses that likes to remain profitable …